The two big reforms that have not been implemented by any government since the historic reforms of 1991 are: agriculture and labour reforms.
In the two previous columns, the authors have analysed how even a coalition government led by Narendra Modi can deliver key economic reforms that will transition India towards a middle-income economy. The goal, or the challenge is very clear: at the moment, the per capita income of India is about $2,500 a year. What is the roadmap to take that to about $5,000 a year in the coming decade? When economists argue this point, they use jargon to showcase how a high and sustained GDP growth rate coupled with low and declining population growth rates creates a virtuous cycle that leads to significantly higher per capita incomes. But the authors would prefer to look at it from the point of view of ordinary Indians. As mentioned earlier, ordinary citizens in India are more concerned with the economic condition of their families than rates of GDP growth. That depends on both livelihood opportunities and inflation. On both counts, ordinary Indians have been facing a hostile environment. Perhaps that also accounts for a part of the reason for the relatively poor performance of the BJP in the 2024 Lok Sabha elections.
The fact is: aspirational Indians have not really benefited as much as they expected from high rates of economic growth witnessed in the aftermath of the Covid pandemic. Most media platforms have been awash with stories of how passenger car sales in India have broken all records by crossing 4 million units in 2023-24. However, very little is written or spoken about two wheelers that are the go to mobility option for aspirational Indians. After reaching a peak of 21 million units in sales in 2018-19, two-wheeler sales have crashed and registered 18 million units in sales in 2023-24 after a so called recovery. The message is clear: the aspirational Indian is either struggling to make ends meet or not feeling confident enough about future livelihood prospects to invest in a two-wheeler.
As Nirmala Sitharaman gets ready to present the Union Budget on July 23, that remains the overarching challenge for her: what steps can be taken to ensure that livelihood opportunities for Indians improve, and their standards of living go up. To be sure, the Union Budget is a mere annual accounting exercise and not a long-term policy reform statement. Yet, the Budget can be a powerful tool to send the right signals to investors and other stakeholders about where the economy is headed. Nothing magical happens immediately after a budget. The signals take time to work through the market and deliver results at a future date. Many criticised Nirmala Sitharaman for lowering corporate tax rates to bring them on par with “investor friendly” countries like Singapore. But despite the criticism that still continues, the signals sent about four years back are bearing fruit. The Indian economy is growing at a comparably fabulous 7% plus rate despite global headwinds, and tax collections have skyrocketed rather than falling, as many critics had predicted four years ago.
This coming budget too needs to send some signals. As the authors pointed out earlier, the most important signal is about improving livelihood opportunities. Despite more than three decades of reforms pushed by coalition and majority governments of all types, and despite the spectacular success achieved in drastically reducing poverty, India has remained a relatively low-income economy. In 1991, the per capita incomes of India and China were comparable. Today, the per capita income of China is about six times that of India. In the previous column, the authors argued how electronics exports from a tiny country like Vietnam are about 10 times that of India. The authors had also pointed out the embarrassing fact that readymade garments exports from Bangladesh were higher than those from India. The first Budget of Modi-3.0 needs to address these issues.
For that to happen, two concurrent things need to play out. First, there has to be a dramatic fall in the proportion of Indians who depend on agriculture for a livelihood. Second, there has to be a simultaneous jump in the contribution of manufacturing to the economy. It is shocking that close to 50% of India is still dependent on agriculture for a livelihood. As long as this continues, India will always remain a low income economy. It is also shocking that manufacturing contributes a mere 15% to the GDP of the country. As long as this continues, India will always remain a low income economy. To that extent, the two big reforms that have not been implemented by any government since the historic reforms of 1991 are: agriculture and labour reforms. Thanks to deeply entrenched vested interests and electoral compulsions, no government has been able to push through these reforms. Modi-2.0 tried with the three game changing farm reform laws in 2020 after getting a massive repeat mandate in 2019. But it completely failed to communicate the genuine benefits that the new farm reform laws will bring to ordinary Indians, including small farmers. In the end, facing a storm of sustained protests and agitations, the farm reform laws were withdrawn by the government. Modi-3.0 must find ways to evolve a consensus on this as farm reform laws are critical. More than 85% of Indian farmers are small and marginal who own and cultivate just one or two hectares of land. More than two thirds of Indians horticulture output (fruits and vegetables) gets wasted because of lack of proper cold storage chains. Farm reform laws will enable small farmers to pick and choose their produce and market. It will lead to cold storage and food processing factories that will create millions of better paid jobs for landless labourers and marginal farmers. Many marginal farmers might even decide to move out of farming.
But that can’t happen unless there is a massive increase in manufacturing and the setting up of mega factories that employ hundreds of thousands of people. For that kind of manufacturing boost, schemes like PLI do play a role. The authors have earlier pointed out how the PLI scheme has transformed India into a world leader in mobile phone handset manufacturing. But beyond PLI schemes, labour laws that have discouraged global investors from setting up large manufacturing plants in India must change. The existing labour laws “protect” only about 10% of India’s work force that is in the so called organised sector. Labour law reforms will actually benefit even the other 90% as massive factories come up in India, like in China and Vietnam.
The authors understand the Budget cannot effect such policy changes. But it can be a declaration of serious intent.
Yashwant Deshmukh is Founder & Editor in Chief of CVoter Foundation and Sutanu Guru is Executive Director.